I am a W-2 contract employee for an out-of-state agency. They take state and federal taxes out. Does that count as "sales"?

[rjs]

I'm not sure what you mean by "a W-2 contract employee." If you get a W-2 you are an employee, not a contractor. Your employer is supposed to withhold state and federal taxes from your pay. If you signed an employment contract, that doesn't change the fact that you are an employee.

An employee does not have sales. Income that you earn as an employee, that is reported on a W-2, is not sales. Are you saying that you also have a business of some kind? Anything you earn as a W-2 employee has nothing to do with your business. On your tax return you cannot report W-2 income as business income.

It doesn't matter what state your employer is located in. What matters for state income tax is what state you work in and what state you live in.